Inflation | Major downward revision in full-year GDP forecast by agencies raises alarm
Fitch Ratings forecast a deeper contraction in India’s economy than previously estimated due to multiple challenges, warning of a looming deterioration in asset quality in the financial sector. The global rating agency said on Tuesday that it expects India’s GDP to contract 10.5% in FY21, more than twice the 5% decline it had forecast in June.
India Ratings said separately that it expects an 11.8% contraction against shrinkage of 5.3% forecast earlier, following a deeper-than-expected 23.9% decline in June quarter GDP.
Fitch’s estimate for India was in contrast with its marginally improved projection for the global economy in 2020–a 4.4% contraction against a 4.6% fall seen in June. Fitch said India recorded one of the sharpest GDP contractions in the world in the June quarter, but noted that growth should rebound strongly in the July-September period amid reopening of the economy. The finance ministry said on September 4 that “India is well on its path to a V-shaped recovery.”
India imposed a nationwide lockdown on March 25, progressively easing this from May onwards. But an uptick in Covid-19 infections saw states imposing mini shutdowns to contain the disease. India currently ranks second in coronavirus infections.
Fitch projects India’s GDP contraction at 9.6% in the September quarter, 4.8% in the December quarter and 4% in the January-March period this fiscal.
“India imposed one of the most stringent lockdowns worldwide in 2Q20 and domestic demand fell massively. Limited fiscal support, fragilities in the financial system, and a continued rise in virus cases hamper a rapid normalisation in activity,” it said in the Global Economic Outlook–September 2020 Recovery Underway report released on Monday.
It said the Indian economy will rebound in FY22, pegging growth at 11%. “The double-digit growth rate we expect for 2021-2022 simply reflects the low base in 2020 – we do not expect GDP to return to pre-virus levels until 1Q22,” it said.
Covid-19 infections are still rising, forcing some states and Union territories to re-impose restrictions, although these localised containment measures are generally less stringent than those imposed in March-April, Fitch said. “The continued spread of the virus and the imposition of sporadic shutdowns across the country depress sentiment and disrupt economic activity,” it said.
The drop in economic activity has damaged household and corporate income, while high inflation has put added strain on home budgets, Fitch said.
Fitch revised its forecast for the US to 4.6% contraction in 2020 from a 5.6% decline earlier. China is projected to grow at 2.7% against the 1.2% seen in June.
It downgraded its projection for emerging markets, excluding China, to -5.7% from -4.7% in June.
The Euro area is seen contracting at 9% for the year compared with an 8% fall earlier on the back of sharper declines expected in the UK (-11.5%), France (-9%), Italy (-10%) and Spain (-13.2%).
The UK, India, France, Italy and Spain stand out as laggards, it said, adding that they experienced stringent and/or lengthy lockdowns in the April-June period, which saw mobility levels fall sharply and a GDP surprise on the downside compared with estimates made in June.
Earlier, Nomura and State Bank of India Research had downgraded their India GDP projections for FY21 to -10.8% and -10.9%, respectively.
“After the NSO (National Statistics Office) putting out the first-quarter GDP, I think the entire recovery path has shifted southwards,” said Sunil Kumar Sinha, principal economist, Ind-Ra, during a webinar on Tuesday.
India Ratings said the only bright spot from the supply side was agriculture, as both industry and services activities have been severely impacted. It expects agriculture to grow at 3.5% in FY21 from the year earlier.